When Russian potash giant Uralkali withdrew from a marketing venture a few months ago that controlled about 43 per cent of global potash exports, many analysts suggested the move and the volatility it was expected to spark would prompt BHP Billiton to shelve its plans to develop a massive potash project in Canada.
But that proved not to be the case. Within a month, BHP said it would continue to invest in its Jansen potash project, with $US2.6 billion over the next three years to be spent ahead of a final investment decision.
That buys BHP Billiton time before it must decide whether to spend an estimated $10 billion or $11 billion more to bring the project fully online.
It also buys investors three more years to judge whether BHP's potash play makes economic sense.
Investors will hope that the outlook for potash looks far different in 2016-17 than it does now. Aside from the uncertainty sparked by Uralkali's abandonment of the cosy marketing structure and its pledge to focus on volume over price comes the more recent move by China's state-owned China Investment Corp to acquire a 12.5 per cent stake in Uralkali through a debt-for-equity exchange.
The deal gives Uralkali a direct pipeline into the Chinese market so coveted by all potash producers and a head-start in overcoming the over-supply and price volatility that has dented the potash sector's outlook since prices soared to $1,000 a tonne in 2007, having since retreated to the mid-$400 level.
BHP's stubbornness doesn't help the sector's outlook. At full capacity, the Jansen project would add the equivalent of 18 to 20 per cent of the global potash sector's annual output. With a potential production output of 10 million tonnes annually, this is nearly double the output of world's largest potash mine currently in operation, Mosaic Co's Esterhazy project in Saskatchewan.
The risk of flooding an already depressed market is muted by the other side of the coin: that BHP's horizon for the project will allow time for the current volatility and uncertainty to play itself out by the time Jansen comes online. By this point, BHP would be a major player in a sector that would be newly focused on market-oriented pricing.
BHP has been actively seeking partners to help finance Jansen, dilute risk associated with the project and find stable, predictable markets overseas. The CIC-Uralkali model would satisfy that criteria, including access to the coveted China market.
So is a Chinese dance partner the answer for BHP to solidify the economic basis for Jansen?
It may very well be. Except for one factor: Canada.
The government of Canadian Prime Minister Stephen Harper has already stymied BHP's potash ambitions once before by scuttling its bid for Potash Corp., and under current market and political conditions could do so again if BHP sought a Chinese partner for Jansen — especially if that partner was state-owned.
Late last year, Harper's government approved state-owned CNOOC Ltd's $C15.1 billion ($A15.5 billion) purchase of Canadian energy firm Nexen Inc and a purchase by Malaysian state-owned Petroliam Nasional (Petronas) of Canada's Progress Energy Resources Corp for $C5.2 billion.
Harper approved those deals reluctantly, amid much talk of protecting Canada's national interests in its energy sector. Fearing a foreign investment chill if he blocked deals that had otherwise played by existing rules, he OK'd the deals but warned that his government would, from then on, only allow state-owned enterprises to buy into Canada's oil sector under “exceptional circumstances”.
Of course, BHP's Jansen project is not an oil play. But the warning seems to be permeating across Canada's resources sector.
In the seven prior years, state-owned firms reportedly invested about $C51 billion in Canada's oil and gas sector.
But since late last year, oil sands deals have fallen to their slowest pace since 2004. Reports suggest a primary cause is the government's intensified scrutiny of investments by state-owned enterprises, which has prompted government officials to review deals that do not require federal approval under Canada's foreign-takeover laws.
The law dictates that the government will vet any foreign takeovers valued at more than $C344 million. But the government has lately been reviewing all transactions involving state-owned enterprises, including those that fall below the $C344 million threshold.
The scrutiny has even forced non-state-owned investors to prove they are not controlled or influenced by a foreign government, determined by such things as whether a foreign government has influence over director appointments or owns a third or more of the investor's voting rights.
Canada's Industry Minister James Moore told Bloomberg last month that since the Nexen and Progress deals foreign takeovers have been “elevated to a new degree of sensitivity”.
“This is something that has greater attention than ever before, and we want to make sure that any decision is given the weight and consideration that it's due and the department is allocating the resources and talent to these kinds of decisions,” Moore said.
Any short-to-mid-term hope BHP may have of drawing in a Chinese state-owned investor into its Jansen project would likely face a steep uphill climb in such a climate.
So the answer to the question of whether Jansen makes economic sense for BHP isn't likely to come from bringing on a Chinese partner. Which may mean BHP's hopes are best placed in betting that the current volatility plays itself out by the time a final investment decision is made in 2017.